Frederick Macaulay spent 17 years studying bond pricing data to understand how the Great Depression and other economic downturns like it occur.

Macaulay was interested in how interest rates impacted bond prices and whether rates could be an indicator of future economic disasters.

His research revolutionized how credit risk is assessed and showed how economists can measure the relationship between bond prices and interest rates.

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Frederick Macaulay spent almost two decades learning about the next economic disaster and how to fight it.

Macaulay’s research couldn’t have come at a better time. By 1938, many investors were desperate for insights into how the economy worked. Specifically, people wanted to know how economic downturns like the Great Depression occurred. He thought the answer could be found in railroads.

Macaulay was interested in how interest rates affected bond prices and whether rates could be an indicator of future disasters.

In a research project spanning 17 years, Macaulay had gathered eight decades’ worth of bond pricing data for long-dated railroad bonds. He pored over the data, making tens of thousands of calculations by hand.

Then, he realized that the market had it all wrong.

Credit investors historically over-relied on maturity when determining the risk of a bond. The further out it came due, the less safe it seemed.

After all, there was no way of predicting what might happen 10, 20, or even 50 years down the line.

This logic appeared to be sound on the surface. However, Macaulay discovered that relying on maturity alone could dramatically distort a bond’s true value.

To get a better picture of a bond’s risk level, investors needed to factor price, maturity, and coupon. Once those have been identified, the next step was to determine duration.

Maturity indicates when a bond contract ends and when a company is legally obligated to pay investors back.

On the other hand, duration is a calculation. It takes into account how much is being earned while the investment is being held and the impact of interest rates on those earnings. Then, it indicates how long investors will have to wait (on average) to earn their money back.

In other words, the weighted average time it takes for an investor to receive all of a bond’s cash flows.

Bonds with a high coupon rate have a shorter duration because investors get more money early on from interest payments.

Meanwhile, lower-coupon bonds have a long duration. Investors have to wait until maturity to get sizable returns.

Say, for example, Bond A has a coupon rate of 2%. It matures in 10 years, has a par value of $1,000, and trades for $800 today.

Bond B has a coupon rate of 10%. Like Bond A, it also matures in 10 years with a par of $1,000. And it also trades for $800 per bond today.

According to common logic in the 1930s, both bonds are equally risky since they both mature in 10 years.

However, this changes when seen through the lens of Macaulay’s duration theory. Bond A’s weighted average time to pay back investors is nine years. Because Bond B pays a higher coupon, it takes just over six years to pay investors back.

In other words, Bond B is far less risky than Bond A.

The real calculation is a bit more complicated. However, this demonstrates the general idea behind Macaulay’s research, which revolutionized how economists judged risk.

Before long, many realized Macaulay’s duration math had another important use: it could measure the relationship between bond prices and interest rates.

When interest rates rose, bond prices fell. And when interest rates fell, bond prices rose. Creditors generally understood this concept a century ago. But with the power of duration, they could determine how much prices would change.

Investors discovered that bonds with higher durations saw much larger price swings when interest rates moved.

Despite these groundbreaking findings, Macaulay’s research collected dust for decades, as stable interest rates in the 1940s, ’50s, and ’60s meant bond prices behaved, too.

When rates swung wildly in the 1970s, bonds once again followed suit. Creditors were desperate for a way to measure their risk, leading them back to Macaulay’s research.

As interest rates rose, bonds with longer durations saw the largest price collapses. As rates fell, those same bonds saw the biggest gains.

Macaulay’s work was essential for navigating the turbulent credit market of the 1970s—it’s also proving crucial today.

The Fed has cut rates three times since September 2025. Further rate cuts could be on the horizon once Kevin Warsh—the administration’s nominee—assumes the role of Fed chair in May.

However, it should be noted that rate cuts aren’t guaranteed yet, as it remains to be seen what the impact of the current conflicts in the Middle East will be. It’s also uncertain how long oil prices will remain elevated.

Provided the conflict doesn’t cause inflation to rise and oil prices come down, the Fed will likely stick to its plan to cut rates. And when that happens, an opportunity could present itself for investors looking to secure timely gains on long-dated, investment-grade bonds that have been overlooked in today’s high-rate environment.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research